A review of things you need to know before you go home on Friday; more retail rate cuts, CPI undershoots, electricity demand weaker, credit tighter except for houses, swaps stay very low, NZD firm, & more

A review of things you need to know before you go home on Friday; more retail rate cuts, CPI undershoots, electricity demand weaker, credit tighter except for houses, swaps stay very low, NZD firm, & more
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Here are the key things you need to know before you leave work today.

MORTGAGE RATE CHANGES
Westpac has trimmed its 1 year home loan rate, matching rivals.

TERM DEPOSIT RATE CHANGES
Westpac has also cut most of its term deposit rates. Heartland, and Bank of China also both cut rates today.

MORE RBNZ STIMULUS?
Consumer price inflation undershoots both the RBNZ and market expectations in September quarter, coming in at +0.7% quarter-on-quarter and +1.4% year-on-year. The weaker inflation will only support the RBNZ’s resolve to do more, and do it early say most observers.

NINE MONTHS NOTICE
Late to announce, Westpac has finally joined the growing set of banks that are giving up on cheques. They have announced that cheques will cease to be available as a means of payment with them after June 25, 2021. They have decided, November 27, 2020 is the final day new cheque facilities will be opened and chequebooks will be reissued automatically by Westpac. March 26, 2021 will be the final day chequebooks and bank cheques will be issued, and June 25, 2021 will be the final day cheques can be cashed and deposited at Westpac in New Zealand. This is also the final day any Westpac cheques can be deposited at any other bank.

LESS ECONOMIC ACTIVITY?
Electricity demand is falling. The 7-day demand is down -7.7% and the 14-day demand is -4.4% lower. Data is from electricity market monitoring by NZX.

TIGHTER CREDIT CONDITIONS, EXCEPT FOR HOUSING
The RBNZ Credit Conditions survey of trading banks reveals strong mortgage lending demand underpinned by low interest rates, re-directed overseas travel funds, and "dissatisfaction with returns on other investments". Banks also reported intensive due diligence to verify applicants’ income and job security when assessing new mortgage lending. SME lending is modest, with demand captured by cheap and easy Government options. Corporate lending is returning for standby facilities. Demand for commercial property lending is low and banks have a reduced appetite for it. And banks reported they have limited appetite for new dairy lending even to improve environmental impacts, while they also see higher demand from sheep and beef units but they remain cautious.

WATER UPDATE
Our hydro lake levels are normal for this time of year. Auckland's water storage is not, being on 68% full when normal is 92% for this time of year. But substantial household reductions in use are extending current supplies with some amazing savings being recorded.

FROM 'STABLE' TO 'NEGATIVE'
Tauranga City's credit rating has moved to a Negative outlook. S&P have rated them AA- and this is unchanged. S&P say Tauranga's very large capital program and lower-than-expected revenue growth will lead to widening deficits and rising debt levels. Meanwhile, the budget is being hit by the COVID-19 pandemic. They see financial management weakening and budgetary performance may underperform their expectations, causing the revised Outlook.

DEATH DATA
There was some interesting death data (for 2019) released in Australia today. Heart disease was the leading cause of death, accounting for 10.8% of all deaths. Dementia overtook lung cancer as the 2nd leading cause of death for males. and their suicide rate was 12.9 per 100,000 people. New Zealand's suicide rate in 2019 was 13 per 100,000. (Disease causes for NZ are here.)

GOLD PRICE LOWER AGAIN
The price of gold is now at US$1,902 in early Asian trading, and down -US$15 from this time yesterday. It is also -US$3 lower than the closing New York price earlier today, but is +US$2 higher than the afternoon fix in London. Silver is dipping too.

EQUITIES UPDATE
The NZX50 Capital Index is down -0.2% today and heading for a weekly slip of -0.4% after the previous week's good gain. The ASX200 is currently down -0.3% on the day and also heading for a weekly -0.4% dip. Shanghai has opened today up +0.2%, Hong Kong has opened flat, and Tokyo has opened up a minor +0.1%. In New York, the S&P500 ended its earlier session up +0.5%.

SWAPS LOW, BONDS UNCHANGED
Markets are expecting the RBNZ is do more stimulus somehow, and that is weighing on swap rates here. We don’t have the final data for today yet and if it is significant we will update it here. The 90 day bank bill rate is unchanged at 0.27%. The Australian Govt ten year benchmark rate is up +6 bps at 0.87%. The China Govt ten year bond is unchanged at 3.20%. And the New Zealand Govt ten year is up +3 bps at 0.61% and above the earlier RBNZ-recorded fix of 0.59% (+3 bps). The US Govt ten year is up +5 bps at 0.86%.

NZD FIRMISH
The Kiwi dollar is back rising again and now at just on 66.7 USc and up slightly from this time yesterday. It has now been three months at this general level in a remarkable stable pattern. Against the Aussie we are stable at 93.7 AUc. Against the euro we are firmer at 56.5 euro cents. That all means our TWI-5 is up at 69.9.

BITCOIN UP AGAIN
Bitcoin is up another +0.5% from this time yesterday, now at US$12,948. The bitcoin rate is charted in the exchange rate set below.

This soil moisture chart is animated here.

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33 Comments

"Tauranga City's credit rating has moved to a Negative outlook."
Their Council is a bit of a mess.
"Tauranga City councillor has resigned and called for the council to be replaced with commissioners.
However, the mayor and other councillors have rejected the claim commissioners need to be called in... this council has been marred by a series of clashes between some elected members, including an attempted coup that led to the deputy mayor quitting and being replaced, councillors calling for mayor Tenby Powell to resign, and a bombshell release of elected member texts and emails under official information legislation that revealed more about the conflicts."

Can't they just increase rates a bit more? There is no discernible reason for them to go bankrupt.

Sadly, we are very poorly served by our council. Initially, I thought Powell was good news-quickly and cheaply sorting out the long-running saga of the base track. Unfortunately, it's been all downhill since then.

Tauranga has turned into a real shithole. Not enough growth and population to give it vitality, but enough growth to turn its roading system into a shambles.
Nice climate and one nice beach, though.

So again limited appetite from banks to lend to businesses who employ the people who are taking out the ever increasing mortgages. It’s their job not the government’s to support small business growth but it looks like they have forgotten.... again. The central bank digital currency will kick the banks into reality when they realise that we don’t really need them. At best they will become building societies concentrating purely on mortgages without the dodgy dealings in the derivatives market. Worst case they will disappear as central banks will issue the debt directly to customers and our traditional day to day banking will be done via the blockchain. There are huge advances in technology that will appear in the next 5 years. This will cause deflation. Read up and see what could happen in both inflationary and deflationary worlds. One thing is certain though, massive change is coming over the next few years, we won’t be going back to how things used to be.

I'd rather have my straight checking/savings accounts direct with the central bank than have an interloper taking a margin.
Likewise a mortgage.
Digitisation removes a lot of the reason for banks, as they were, to exist -- we don't need branches (much), tellers, cash handling, giant safes holding cash... It's not the old days when your local bank manager knew you well and made a qualified judgment on your creditworthiness, it's all anonymous algorithms anyway. So why pay the margin?
The only thing banks can do that a CB + algorithms can't: business lending that requires a degree of expertise in assessing business plans, et cetera. Which is precisely what they don't want to do at a time of elevated risk, much better to lend on houses, hence our present conundrum. I've gotta think that banks as we know them are in a similar position to oil companies; they have a fat tail of existing business, but their almost complete extinction is inevitable over c.50 years.

The central bank digital currency will kick the banks into reality when they realise that we don’t really need them.

You are expecting utopia - the central bank won't finance business, it will just manage cash disbursement to those that wish to avoid a bank account or those that are declined such utility and the rest because the banks don't want to incur the cost. The RBNZ is totally ill equipped to scrutinise the necessary intelligence associated with extending a business loan.

The global banking system is not about to disappear because civil servant claims otherwise - G-SIBs act in the mega $trillion eurodollar world beyond the tentacles of central banks' reach.

Our local bank branch has used COVID as an excuse to only open 3 days a week, 4 hours per day.

Where is Retired Poppy?

He eloped with Rick Strauss and Ex Expat.

Were The Man

The RBNZ Credit Conditions survey of trading banks reveals strong mortgage lending demand underpinned by low interest rates, re-directed overseas travel funds, and "dissatisfaction with returns on other investments".

It's all in the hands of the RBNZ - as I keep repeating:

Is this responsible RBNZ regulatory oversight:
Banks extending 60 % of their lending to one third of already wealthy households to speculate in the residential property market because the RBNZ offers them an RWA capital reduction incentive, to do so.
Or this:
RBNZ cutting the OCR in half five times since July 2008, causing the rich to capitalise rising discounted present values of future asset cash flows.
There is one caveat:

.. the most important macroeconomic variable cannot be the price of money. Instead, it is its quantity. Is the quantity of money rationed by the demand or supply side? Asked differently, what is larger – the demand for money or its supply? Since money – and this includes bank money – is so useful, there is always some demand for it by someone. As a result, the short side is always the supply of money and credit. Banks ration credit even at the best of times in order to ensure that borrowers with sensible investment projects stay among the loan applicants – if rates are raised to equilibrate demand and supply, the resulting interest rate would be so high that only speculative projects would remain and banks’ loan portfolios would be too risky. Link

FROM 'STABLE' TO 'NEGATIVE'
Tauranga City's credit rating has moved to a Negative outlook. S&P have rated them AA- and this is unchanged. S&P say Tauranga's very large capital program and lower-than-expected revenue growth will lead to widening deficits and rising debt levels.

I guess the discounted present values of it's future liabilities have skyrocketed without a commensurate increase in those of it's asset cash flows and income receipts.

In the real world it is being felt, after this years rate increase, my insurance and rates amount to $188 a hectare, and more to come in the future.

I am making $600 a hectare trading margin this year, rates and insurance amount to nearly %30 of my gross income.

Talked to a friend in Auckland who is closing his business and laying off three people, the Lockdown and lack of recovery according to him.

This is just the beginning - wait until interest rates go negative - we will witness the ruin of our economy, including infrastructure, just as they have in the northern DM nations - state run assets be will subject to atrophy, and yet the private sector will remain unwilling or unable to provide a working substitute.

What's the discounted present value cost blowout on the fixed 25 year $125 million p.a. government payout to the private contractors financed by the private sector when Transmission Gully eventually becomes operational? Around ~$2.5 billion with the 10 year government bond trading at ~50 bps compared to 850 million back in 2014?

by Stephen Hulme | 1st Aug 16, 2:29pm

"Whilst very low interest rates do distort some economic and investment decisions in New Zealand, the benefits in terms of commencing major infrastructure build projects (transport, irrigation and civil) earlier than normal due to the massive reduction in the financing costs are massive. It is an opportunity in a lifetime for central government, local government and the private sector to advance such projects at a pace."

Is that so?

Transmission Gully costs estimated at 29July 2014.

The Transmission Gully project’s net present cost is $850 million. This is the “whole of life” cost, for WGP to build and then operate the road for 25 years. Because the costs are spread over time, they are expressed in today’s terms.

This is $25m less than what the contract would be expected to cost through conventional procurement, and hence meets The Treasury’s value for money test for PPPs.

The cash payments will be around $125 million per year, starting only when the project is finished and open for use, and lasting for 25 years. This stream of cash payments brought back to today’s dollars is $850 million and is the “net present cost”. Link

At the time of the above press release 10 year NZGSs were yielding ~4.5%. Currently they yield 2.165%.

In reality one would expect: This stream of cash payments brought back to today’s dollars is $850 million and is the “net present cost, to have risen considerably and possibly doubled if I could be bothered to undertake a full IRR analysis, and was in possession of the original discount factor and timing method.

There are 10 units for lease in Auckland's Queen street Strand Arcade.

That's a disaster. A nice historic arcade that's been taken over by cheap and nasty junk, and now laid to waste now the demand for that junk has evaporated....

Why would their liabilities skyrocket in time of extreme low interest rates? It’ll be blow out budgeted expenditure that is driving lower rating. The nominal $ must be way in excess of lower discount rate.
Their rates must be on course for hike given extreme values of housing in The Bay.

Why do asset prices blow upwards in a falling interest rate environment? Official NZ interest rates have been cut in half five times since 2008. The present value of discounted future asset cash flows double each time interest rates are cut in half. Obviously, there is no guarantee future cash flows won't fall given falling interest rates suspect lower levels of future economic growth, hence speculators are wary of pricing in the full theoretical present valuations. Why wouldn't future liabilities, on the other side of the balance sheet, not be subject to the same discounted present value calculations.

If you are still not sure check out Peter Fisher -Wealth effect or wealth illusion?- page 5 of 8- pdf.

ACC is another good example.

Why do asset prices blow upwards in a falling interest rate environment?

Why? Human behavior. Think Pavlov's dogs. It's very one-dimensional thinking. For the same reason, most people wouldn't consider owning gold as it has no return.

Why did Treasury discount the net present value of 25 years of $125 million future annual payments ($3.125 bn) to $850 million back in 2014 to justify the PPP Transmission Gully project, when 10 year government bonds had yield of 4.5%, now around 0.50%? The time to finance this liability would be now.

The Transmission Gully project’s net present cost is $850 million. This is the “whole of life” cost, for WGP to build and then operate the road for 25 years. Because the costs are spread over time, they are expressed in today’s terms.

This is $25m less than what the contract would be expected to cost through conventional procurement, and hence meets The Treasury’s value for money test for PPPs.

The cash payments will be around $125 million per year, starting only when the project is finished and open for use, and lasting for 25 years. This stream of cash payments brought back to today’s dollars is $850 million and is the “net present cost”. Link

For the same reason, most people wouldn't consider owning gold as it has no return.

Gold trades in contango, hence cash and carry trades could earn around 1.39% against the April 21 future short. I had a client with his own bullion vault in Switzerland who did this all the time back in the late eitghties. He eventually sold it to UBS. Many Middle East people did the same to get around prohibitive Sharia law in respect of a ban to be receipt of interest.

While I'm sure effect of low interest rates on discounting can be partially or even mostly blamed on the TDC's carelessness with it's cash flow, it's incompetence and maybe some soft corruption that have caused the current budget blowout. We never needed a transport hub or more central city parking and now we have a disaster that will cost 10s of millions for nothing.

Melbourne protestors re lockdown.
These scenes seem more like a dystopian movie.
https://www.9news.com.au/national/antilockdown-protesters-gather-melbour...

This is a sad outcome for police. The suicide rate for French police attempting to control the yellow vest riots, for well over two years, has risen sharply.

People know something’s wrong but dont really know what it is.
Then the professional anarchists join in.

Governments are imposing more and more taxes on the working and lower middle classes while their standard of living declines. You can see the same in New Zealand with the passing of the Fuel Tax in Auckland and Sales Tax on internet imports. It seems only a matter of time before New Zealand faces a similar backlash about new taxes.

Only 1 new tax there - GST should always have been paid on internet purchases.

Road tax is to help catchup on building Aucklands transport infrastructure, which was until Covid, having to accommodate 800 extra cars every week. It’s basic user pays.

The real issue is not taxes, which haven’t really changed in a decade. It’s productivity, exports and wages. NZ just doesn’t make enough valuable stuff anymore and there is no plan to protect/enhance those industries that still do.

Living in a rural area with declining roading infrastructure I don't need my road taxes going to Auckland when the money needs to be spent here. Hardly user pays.

when i see this rubbish it does make you wonder if the wrong people are taking the risks to find us ways of treatment for covid
One woman claimed "the virus isn't real" and that it was a "control tactic" used in an attempt to bring in "new world order".
"It's just a flu," she said.
RIO DE JANEIRO — A Brazilian who participated in the clinical trial of an experimental coronavirus vaccine has died, officials here said Wednesday.
The news service G1 said the volunteer was a 28-year-old physician who treated coronavirus patients in Rio de Janeiro.
https://www.washingtonpost.com/world/the_americas/coronavirus-oxford-ast...

The key is in the detail. He got the placedo injection then died of covid. Doesn't indicate anything about the vaccine

the point is a young guy whom volunteered to be part of the vaccine trial, most likely because of what he has seen in his day to day life, lost his life. he would have be vetted before to make sure the risk was small and monitored but even with those safe guards he paid the ultimate price.
mean while you have tinfoil hat wearers telling everyone its just like the flu and it only effects sick old people,
there is now so much evidence that it can be not just deadly but effect people whom were otherwise healthy for months or years and shorten life.
one of the findings is the damage it does to lung tissue and how people that have had it when young can get post-COVID fibrosis
https://www.healthline.com/health-news/lifelong-lung-damage-the-serious-...

This non-consensual Stimulus is no longer enjoyable, and there is no Safe Word. What to do but grit one's teeth and wait for the (governor's) bubble to burst!?